When the pandemic broke out, more than a year ago, an economic collapse was feared and with it a violent fall in the prices of metals. Although 2020 saw the largest contraction in global GDP in the last five decades, not only was there no economic and financial collapse, but since the third quarter of 2020 there has been one of the largest increases in several metals, including copper . Two reasons explain this situation. While the rapid containment of the infection in China brought the main consumer of raw materials back to pre-pandemic levels of activity, making it the factory for the rest of the world for several months, the rest of the world, and mainly the world Western, has been massively injecting monetary and fiscal stimuli, which have reached historic limits.
The pandemic had the effect of temporarily reversing industrial intensity, as witnessed by the jamming of Chinese ports and the high demand for containers in that country. But the evidence indicates that the peak of Chinese industrial activity occurred in the first part of the year and is likely to decrease in the coming months. The relative control of the pandemic in other countries is allowing a global economic normalization that reduces dependence on the Asian colossus. Strictly speaking, China has been the great country for copper consumption in the last two decades, but its industrial intensity has been decreasing as part of long-term strategic efforts to strengthen the advance of more sophisticated economic sectors and that will be the new ones. engines of economic growth such as high-end technological research and development and the service sector.
Regarding the stimuli, it is necessary to point out that these are unprecedented magnitudes in the history of the world economy. In this way, it has been avoided that the brake on many productive activities and high unemployment translate into a crisis that is difficult to manage. And while these stimuli persist, there will continue to be a tailwind in the prices of assets, such as stocks and commodities. A good example of this factor could be seen a few days ago when the United States Federal Reserve hinted at the possibility that the monetary stimulus would end earlier than planned (towards the end of 2022 instead of 2023), which triggered a correction of high intensity asset prices.
In any case, the evolution of these stimuli will have to be carefully observed as it will be key to the performance of the world economy in the coming years. For example, the United States is looking to supplement the monetary pathway of its incentives with large-scale fiscal plans, such as the possible bipartite infrastructure plan recently announced by Biden for $ 1 trillion.
Faced with such a scale of monetary and fiscal packages, concern arises about the consequences of these massive stimuli on the world economy. In a short-term perspective, it is feared that an unmanageable level of inflation will be generated that will force interest rate hikes to advance and with it the tailwind that sustains the world economy. But in the medium and long term, the fear is that these heavy injections of money have exacerbated and / or incubated excesses in some markets that could result in a global financial crisis by the middle of the decade.
At this point in the analysis we should return to China, since this country has adopted, for more than a decade, a critical view of the gigantic stimulus policies applied by the West for fear of their consequences. It is very pertinent to remember that this vision of the Asian giant stems from the origins of the Subprime Crisis in the United States that triggered the Great Financial Crisis in the West. In this way, the actions taken by the Chinese authority in recent weeks in terms of moderating its industrial activity (especially the highly polluting one) and trying to control financial excesses, including possible speculative activities in raw materials, should be understood in this way.
The decision to deliver amounts of copper, zinc and aluminum accumulated in the Chinese strategic reserve to the market, reveal the concern of this country for possible inflationary outbreaks. Regarding these actions, it should be mentioned that, on the one hand, the quantities are small enough to significantly influence prices. On the other hand, they reflect rather a signal from the government to the market, at a time when the trend in the economy was already heading towards a moderation, probably reinforcing the direction that the market itself had already taken.
Another factor to keep in mind is geopolitical. China celebrates on July 1 the centenary of the founding of the communist party, a relevant date that it will try to highlight on a global scale. But for the same reason its contender, the United States, will seek exactly the opposite. There are several possibilities that could overshadow this occasion. The situation in Hong Kong, Taipei and the South China Sea are critical, while in Central Asia the renegotiation of the nuclear agreement with Iran and the tension around Crimea pose sources of open conflict. Additionally, it is necessary to remember that we are spectators of a slow but sustained reconfiguration of the world order known since the end of the Second World War. In this adjustment of forces, the securing of essential raw materials for the great economic powers will be part of the first line of interest. The sharp increase in the risks of nationalist policies is not unrelated to the above, and perhaps it is more of a consequence. In short, events that have an impact on world markets in the coming months cannot be ruled out.
And when it comes to risks, the pandemic cannot be ignored. It may have been taken for granted that vaccination will solve the world’s semi-paralyzed situation in the last year and a half, but news of new variants of the virus raises questions about how effective the balance between effectiveness of vaccines and mutations of the virus will be. virus to aspire to the end, or at least moderation, of the pandemic. If the situation spreads, maintaining palliative economic measures will become increasingly difficult and with it global stability will be more challenging. Even if the balance is positive, it is clear that in the most advanced Western economies there is growing questioning of the origin of the pandemic and that it could become a new source of geopolitical instability with China.
In short, the next few months should be favorable for the prices of copper and other commodities, although probably in a more moderate tone than that registered in recent months. As a note of caution, however, it is an increasingly complex geopolitical context that could manifest itself in significant levels of volatility in the markets.
Source: Sonami
Translated with Google Translator